Below are three independent and unrelated errors. On December 31, 2017, Wolfe-Bache Corporation failed to accrue office supplies expense of $1,400. In January 2018, when it received the bill from its supplier, Wolfe-Bache made the following entry: Office supplies expense 1,400 Cash 1,400 On the last day of 2017, Midwest Importers received a $82,000 prepayment from a tenant for 2018 rent of a building. Midwest recorded the receipt as rent revenue. At the end of 2017, Dinkins-Lowery Corporation failed to accrue interest of $7,200 on a note receivable. At the beginning of 2018, when the company received the cash, it was recorded as interest revenue.

Required: For each error: 1. What would be the effect of each error on the income statement and the balance sheet in the 2017 financial statements

Question

Dwayne Ross

Business

3 July, 18:01

Below are three independent and unrelated errors. On December 31, 2017, Wolfe-Bache Corporation failed to accrue office supplies expense of $1,400. In January 2018, when it received the bill from its supplier, Wolfe-Bache made the following entry: Office supplies expense 1,400 Cash 1,400 On the last day of 2017, Midwest Importers received a $82,000 prepayment from a tenant for 2018 rent of a building. Midwest recorded the receipt as rent revenue. At the end of 2017, Dinkins-Lowery Corporation failed to accrue interest of $7,200 on a note receivable. At the beginning of 2018, when the company received the cash, it was recorded as interest revenue.

Required: For each error: 1. What would be the effect of each error on the income statement and the balance sheet in the 2017 financial statements

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Answers (1)

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Angelo Duran · Answer 1

1. Balance sheet - understatement to current liability by $1,400 (accrued supplies)

Income statement - overstatement of income by $1,400

2. Balance sheet - understate current liability (unearned revenue) by $82,000

Income statement - overstatement to revenue by $82,000 which also overstates income by same amount

3. Balance sheet - understatement of current asset (interest receivable) by $7,200

Income statement - Understated revenue by $7,200 which will result to understated income by same amount

Explanation:

•Income statement is affected by all transaction with nominal accounts and balance sheet affects all transaction with real accounts.

•Failure to recognize Wolfe-Bache's accrued supplies expense resulted to understated expense which in turns overstates income by $1,400. In relation to that is an understatement to current liability (accrued supplies expense) by $1,400. Missed entry below:

Dr supplies expense $1,400 (nominal account)

Cr Accrued supplies expense $1,400 (real account)

•Midwest mistake of recognition unearned rent as rent revenue will result to an overstatement of revenue by $82,000 and understatement of current liability (unearned rent income) by $82,000. Adjustment entry below:

Dr Rent revenue $82,000

Cr Unearned rent revenue $82,000

•Dinkins-Lowery's failure to recognize accrued interest will result to understatement to revenue by $7,200 and understatement to current asset (interest receivable) by $7,200. Entry is Debit interest receivable $7,200 and credit interest revenue $7,200.